Morgan v. Bank of Waukegan

• Decision Date: 20 November 1986
• Docket Number: No. 85-2675,85-2675
• Citation: 804 F.2d 970
• Parties: , RICO Bus.Disp.Guide 6423 Margaret MORGAN and Burton Morgan, Plaintiffs-Appellants, v. BANK OF WAUKEGAN, a banking corporation, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 970

804 F.2d 970

55 USLW 2255, RICO Bus.Disp.Guide 6423

Margaret MORGAN and Burton Morgan, Plaintiffs-Appellants, v. BANK OF WAUKEGAN, a banking corporation, et al., Defendants-Appellees.

No. 85-2675.

United States Court of Appeals Seventh Circuit.

Argued April 1, 1986.

Decided Oct. 23, 1986.

Rehearing and Rehearing En Banc Denied Nov. 20, 1986.

Kenneth K. Ditkowsky, Ditkowsky & Contorer, Chicago, Ill., for plaintiffs-appellants.

Michael L. Sherman, Chicago, Ill., for defendants-appellees.

Before CUMMINGS, FLAUM, and RIPPLE, Circuit Judges.

CUMMINGS, Circuit Judge.

This case comes to us on appeal from the district court which dismissed the complaint of plaintiffs Burton and Margaret Morgan for failure to state a claim against defendants Bank of Waukegan ("the Bank"), John Crim (a loan officer at the Bank), Robert Dubin, Morton Goldsmith, Ausbin Godbolt, Eric Enterprises, Sheldon Lovinger, and other unknown defendants, 615 F.Supp. 836. Plaintiffs' complaint had two counts based on the civil provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-1968, as well as several pendent state claims. For the reasons stated herein, we reverse the district court's dismissal of plaintiffs' complaint.

I

The facts as alleged by plaintiffs are somewhat muddled but are basically as follows. In April 1978, defendants Robert Dubin, Morton Goldsmith, and Arnold Shifrin (Shifrin has been discharged in bankruptcy and is not a party to this suit) formed a series of corporations: Grand Drugs, Inc., Glen Flora Drugs, Inc., SDM, Inc., and Utica Pharmacy, Inc. Goldsmith then introduced plaintiffs to Dubin, Lovinger, and Shifrin. Goldsmith, Dubin, and Lovinger made various allegedly false representations to plaintiffs in order to induce them to invest in a series of corporations (referred to as the "venture"), to guarantee loans of the venture, and to use their home as additional security for the venture. In other words, plaintiffs were allegedly induced to give both money and credit to the venture, including the equity in their home. Mailings were made in connection with the obtaining of the loan.

Subsequently the defendant Bank became involved in this venture. Specifically, the Bank agreed to lend money to the venture, which at that time consisted of SDM Pharmacy, Grand Drugs, and Glen Flora Drugs. To secure plaintiffs' credit for these loans, the Bank required them to enter into a land trust agreement, convey a beneficial interest in their home to the Bank, and sign various guarantees.

By August 7, 1980, the venture was in default. Plaintiffs claim that much of the assets of the venture were then removed by Dubin and Goldsmith, with the knowledge and consent of the Bank and defendant Crim, to the premises of Utica Pharmacy (Utica Pharmacy was not a party to the loan). The next day defendant Godbolt formed Waukegan Drugs, and at a foreclosure sale conducted by the Bank and Crim, it purchased the remaining assets of the venture. Mailings were made as part of this foreclosure sale. The Bank loaned money to Godbolt and took back a note and a security interest in the remaining assets of the venture.

The same scenario was repeated seventeen months later. Waukegan Drugs defaulted on its August 1980 loan in January 1982. Once again, with the Bank's assistance, Godbolt formed a new corporation, defendant Eric Enterprises, and it purchased the assets of Waukegan Drugs at a second foreclosure sale. Once again, several mailings occurred as part of the foreclosure sale. A deficiency remained, however, and in December 1982 the Bank and Crim commenced an action to assume ownership of plaintiffs' home in order to repay this debt.

II

Section 1964 of RICO ¹ enables a private plaintiff to bring a civil suit based on a violation of Section 1962. In the instant case, each of plaintiffs' two civil RICO counts attempt to state claims under both Section 1962(a) and Section 1962(c). A violation of Section 1962(a) requires the receipt of income from a pattern of racketeering, and the use of that income in the operation of an enterprise. Masi v. Ford City Bank and Trust Co., 779 F.2d 397, 401 (7th Cir.1985). A violation of Section 1962(c) requires conduct of an enterprise through a pattern of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., --- U.S. ----, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346. In both Sections, a crucial element of the claim is the existence of a pattern of racketeering activity.

Plaintiffs' first civil RICO claim is against defendants Dubin, Goldsmith, and Godbolt and is made under both Sections 1962(a) and 1962(c). Both of these subsections of Section 1962 require plaintiff to show a pattern of racketeering activity and an enterprise, although the precise relationship between these two elements is somewhat different in each subsection. For purposes of Section 1962(a), plaintiffs allege that the enterprises are the Bank and Utica Pharmacy. For purposes of Section 1962(c), plaintiffs allege that the enterprises are the same two entities plus Grand Drugs, Glen Flora Drugs, and SDM. For purposes of both Sections, plaintiffs allege that the pattern of racketeering activity consisted of various acts of mail fraud committed over a four-year period. In particular, plaintiffs point to an April 1978 mailing to plaintiffs made in connection with the loan obtained by defendants, and mailings in both August 1980 and January 1982 made in connection with the foreclosure sales that took place at those points in time. Plaintiffs' second RICO claim is against defendants Godbolt, Dubin, and Goldsmith and is also made under both Sections 1962(a) and 1962(c). In this claim the enterprises are the Bank and Eric Enterprises, and the pattern of racketeering activity again depends in large part on various acts of mail fraud committed in connection with the foreclosure sales.

The precise reason for the dismissal by the court below is not clear. The court at least in part seemed motivated by the sloppiness of the third amended complaint and the failure of plaintiffs to articulate their allegations so as to display how each requirement of a civil RICO claim was met. But the main reason for the dismissal appeared to be plaintiffs' supposed failure to allege a pattern of racketeering activity. This reasoning gives us our first chance to comment on this very important development in the statutory construction of RICO which has occurred largely in the year since the Supreme Court handed down its decision in Sedima on July 1, 1985.

As noted above, this case comes to us following the district court's grant of defendants' motion to dismiss the plaintiffs' third complaint for failure to state a claim. Upon a motion to dismiss under Fed.R.Civ.P. 12(b)(6), plaintiffs' allegations must be accepted as true. A complaint can be dismissed for failure to state a claim only if it is clear that no relief could be granted under any set of facts that could be proved consistent with plaintiffs' allegations. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59; Doe v. Saint Joseph's Hospital, 788 F.2d 411, 414 (7th Cir.1986). With both the structure of a civil RICO claim and this legal standard under Rule 12(b)(6) in mind, the question is whether plaintiffs have sufficiently stated a claim upon which relief can be granted.

III

The expansiveness of civil RICO is well illustrated by the filing of the instant case and United States v. Yonan, 800 F.2d 164 (7th Cir.1986). Plaintiffs have essentially alleged that defendants defrauded them. Without RICO, persons who have been defrauded in this manner would have to rely on state law remedies as a basis for a suit. However, the tremendous breadth of the language of civil RICO has caused a large number of these so-called "garden variety" fraud claims to be brought in federal court. Of the 270 district court RICO cases prior to 1985, 37% involved common law fraud in a commercial or business setting. Report of the Ad Hoc Civil RICO Task Force of the ABA Section of Corporation, Banking and Business Law 55-56 (1985) (cited by Sedima, 105 S.Ct. at 3287 n. 16). This has led various courts, though not this Court, to create restrictions on a civil RICO claim such as requiring a defendant to have been convicted of the predicate acts or requiring a plaintiff to have suffered a "racketeering injury." The Supreme Court has rejected these attempts to limit the scope of the civil RICO provisions as contrary to the language and history of the statute. Sedima, 105 S.Ct. at 3279, 3284, 3287. This Circuit has consistently held that RICO must be given the broad effect mandated by its plain language, see, e.g., United States v. Yonan, 800 F.2d 164 (7th Cir.1986), Illinois Department of Revenue v. Phillips, 771 F.2d 312, 316 (7th Cir.1985), and the Supreme Court has affirmed our reasoning, American National Bank & Trust Co. of Chicago v. Haroco, --- U.S. ----, 105 S.Ct. 3291, 3292, 87 L.Ed.2d 437. The sweep of RICO is admittedly broad, and our function is to apply the language of the statute as drafted by Congress, not to rewrite the statute as we might prefer it to be. Sedima, 105 S.Ct. at 3287.

In rejecting the attempts made by other courts to limit the scope of RICO, the Supreme Court suggested that the courts have overlooked the pattern requirement as a way to limit the scope of RICO while remaining consistent with the language of the statute. A pattern of racketeering activity requires "at least two acts of racketeering activity." Section 1961(5) (emphasis added). The Supreme Court noted that this implies that "while two acts are necessary [for the pattern requirement to be met], they may not be sufficient." Sedima, 105 S.Ct. at 3285 n. 14. The Supreme Court went on to note that the Senate Report on RICO seemed to require continuity plus relationship between the predicate acts for the pattern requirement to be satisfied. Id. The Supreme Court also noted that...